News & Articles

PREPare Plan Found to Be Reportable Notice 95-34 Type Plan

12 / 07 / 2020

Turnham v. Commissioner, 2020 U.S. App. LEXIS 35156 (11th Cir. 11/6/20)

The 11th Circuit Court of Appeals has upheld a lower court's determination that a PREPare Plan established for a doctor and his medical practice generated questionable deductions that needed to be reported to the IRS using IRS Form 8886, and that because they did not do so, a substantial penalty was properly assessed.  The court did not rule on whether the extremely large deduction of $837,000 was deductible; rather, that it was reportable.

Under Notice 95-34, employers are warned about when they might not be entitled to a deduction for contributions made for life insurance benefits set aside for employees, using multi-employer welfare benefit plans designed to provide pre-retirement, post-retirement life insurance benefits for covered employees.

Here, instead of universal life, a term life plan was coupled with a separate group annuity.  However, under the PREPare Plan, employees were told that ultimately, they remained the beneficial owner of the underlying benefit such that one paid up, they could trade it in for another benefit.  

The court noted the red flags.  Most notably, how only a tiny fraction of the $837,000 that was deducted was actually used to pay premiums, whereas nearly all (97%) was put into the group annuity product.  Thus, very little in terms of the deduction taken actually went into the term life policy.

For these reasons, the court found that the transaction as pursued was akin to the transaction described in Notice 95-34 and found it to be reportable using IRS Form 8886.  Because this was not done, penalties for failing to disclose it were applied.

If you have any questions about any reportable transaction, please do not hesitate to contact Mr. Tufts at 407-647-7887.